San Diego, Baja can have sustainable startup ecosystem

San Diego has everything a successful tech ecosystem needs: great research universities and institutes; vibrant tech industries and companies; a young, diverse, well-educated, tech-savvy workforce; and a beautiful environment where everyone (should) want to live. There is a wealth of software engineering and design talent both on this side of the border as well as in Mexico and plenty of focused entrepreneurs founding companies.

But San Diego has not capitalized on these advantages. It seems like the opportunities for entrepreneurs are so much greater in Silicon Valley, that competing as a region is at best quixotic. Silicon Valley has been successful because of the advantages outlined above, the passion of farsighted and brilliant founders, and has both first mover and last mover advantages, which it is not likely to lose anytime soon.

And yet, places like New York, Tel Aviv, Los Angeles, and even smaller cities like Austin and Boulder are encroaching on Silicon Valley’s dominance. The question is, why them and not San Diego? Baseball provides an illustration — why are the Yankees so damn successful? Because they have so many fans.

More fans translates to more dollars, through media and merchandise sales. Silicon Valley is like the Yankees — it gets capital from everywhere. But just as the Colorado Rockies, the Texas Rangers and the L.A. Dodgers fan bases are huge, so are the pools of capital where there is a sizable group of investors that are centered on a single city.

The pooling of capital in particular centers enables there to be a breadth of investors at each level necessary for a startup ecosystem to thrive. From friends and family to angel investors to more formal venture capital firms, there is always someone for entrepreneurs to turn to start, get traction and explode into growth. The nascent ecosystems I am familiar with (San Diego/Tijuana, Mexico City, Santiago and Colombia) are all locations where there is a gap in the capital ecosystem between the initial capital and the more formal VC capital. Friends and family, incubators/accelerators, and, in Latin America, government funding, exist to get companies started — but there is no capital after that until companies get enough traction to attract formal funding. No money = no traction, and thus the vast majority die.

Why is there this Valley of Death at the early stages of entrepreneurial companies in so many cities? It’s clear that the plummeting cost of founding companies has misdirected founder attention to create mobile app, social media and eCommerce clones that are successful in Silicon Valley because the investors there are comfortable with the level of risk. Such investors do not exist in sufficient numbers in cities lacking great depth and breadth of capital. What investors exist seek investments in companies where they have some level of understanding and expertise.

Successes in New York, Tel Aviv and Los Angeles show that the funded companies play on the existing interests of the business community and thus investors that already exist (media in New York, content and fashion eCommerce in L.A., security in Tel Aviv). Moreover, once some success is achieved, they are able to branch out into other areas, as we’ve seen recently in all three places. Location matters. Founders must see where potential investors in their region will invest, based on something local, differentiable and sustainable.